Should I spend 3/4 of my savings to buy a new car that costs about a year of my annual salary?

Question

Since I still live with my parents I've been saving money for a while. All these savings amount to around 15 months of my current salary.

Now I need a car.

Cars are pretty expensive. I don't want to buy a used car and be stuck with mechanical problems to be fixed every now and then. That costs money.

So I decided to go for a new car.

The car I want to buy would cost 75% of my current savings.

Would you purchase a car in that manner?

The other option is monthly installments which would lower my monthly savings to pay for the car loan.

What do you think would be money wise here?

Update

• My wage is around £800 and cars costing £800 where I live are just plain garbage (wires are hanging out and all) A decent cheap (likeable or not) car starts around £3000.. Those are actual numbers; I just used internet currency converter

• It took 2 years to gather my savings

• I don't think I'll be living with my parents in 5 years (maybe in 1 or 1 and half years moving out will become an idea to think about)

• If I save money to the same rate till the end of this year, I will have enough savings to buy an economic house or enough down payment to buy for a midlevel standing apartment/house

• Since it was asked several times in the comments, let me say that: I'm from Africa (West Africa). I was hopping more for common sense and money wise like answers. I got a lot more valuable answers/comments than I expected. You guys are awesome. It'll take me a little more time than I thought to read all these. Feel free though to take into account this location in you answers/comments

Answer 1

If your current savings represents 15 months of salary and the car you are looking at purchasing costs 75% of your current savings, that means that buying a car that costs 11.25 months of your current salary. That is an insanely expensive car relative to your means. From a financial perspective, buying this car would be devastating. I would strongly suspect that you are discounting the cost of maintaining this new car and that you are inflating the cost of dealing with occasional mechanical problems with a decent used car that you can more comfortably afford.

Money wise, the best course of action would be to reconsider the plan. Buy a much (much) less expensive used car that you can much more comfortably afford. Deal with the occasional mechanical issue that will inevitably appear. Drive that car until the wheels fall off.

Answer 2

I just bought my daughter a car. A 2018 just coming off lease. 21,000 miles, and about half the price of the same car new. The money saved on insurance alone is significant. Her prior car was driven to 200,000 miles, and only the last 30,000 or so was heavy on repairs. In hindsight, we should have made the move at 150,000 or so. So her new car has about 80% of its life remaining and even some residual value after that.

Answer 3

Always pay cash. If you cannot afford a new car right away, buy a used one. If you cannot afford a used car, you are in no position to afford a car loan.

Whether 75% of your savings is too much, is depending on your cash flow. I am sure my first car (during university times) cost me more than 75% of savings. And after I started working, I got another car which again took most of my savings. But in both cases I had a good positive cash flow that was making up for this within less than a year.

Answer 4

It all depends on the interest rate being offered. You cannot make a generalization.

New car loans from the manufacturer are subvented. This is a major benefit to buying new. This means the manufacturer pays part of the financing cost out of its margins, in order to encourage sales of new cars.

I recently got a new car loan at "0%" APR. In reality, it was 0.9% because there's a cash rebate that I didn't receive.

I could have taken that money and deposited in a CD at the same company's finance arm and received 1.5% interest. That is, I could have been paid 0.6% to loan money to myself.

Obviously, I took the deal and kept the money in my existing investments, which easily realize 10x that, and I still have access to that money if an emergency occurs.

Additionally, for younger people, an installment loan on your credit record will greatly help you get a mortgage. (Credit scores for mortgages distinguish between long-term installment loans versus revolving credit cards)

The actual interest rate being offered depends on your creditworthiness and country. You need to determine what interest rate is being offered, and how that compares to alternatives including the benefits of having more rainy-day funds.

Answer 5

Yes, pay cash from savings to buy a car. 75% of your savings is probably fine, depending on your total savings and income level. This does not scale linearly, so concrete numbers would be helpful in better answering your question.

All cars have mechanical problems. Used cars probably have fewer than you think. New cars are a high price to pay to avoid them.

Answer 6

With few exceptions, if you borrow money, you will pay interest. That means you are paying extra for that money. This interest makes whatever you buy significantly more expensive.

There are only 2 advantages to taking out a loan and not using the money you already have:

1. You will have more money available for emergencies and the unexpected (and life rarely goes as planned).
2. You will have the opportunity to invest the money. The only guaranteed investments earn almost zero interest right now, and all other investments carry significant risk of losing your principle.

Overall, I would recommend against taking out a loan.

Regarding the price of the vehicle, it would be ideal to spend less on the vehicle and save some of your money for emergencies, the unexpected, and charity. But, if you have no other significant expenses, and don't foresee any in the near future, spending 75% of your savings may be okay. Don't forget about taxes, maintenance, disposables (tyres aren't cheap!), insurance, and petrol. Plus, if you keep your job, you will have a steady source of income.

That said, buying a new vehicle is almost always a rip-off. As soon as you take it off the lot, most vehicles depreciate by 15-20%. That's money you just lost and can't get back.

Your best value will likely be to buy a vehicle a few years old that has already experienced that instant depreciation. With the money you save, you'll be able to afford a whole lot of maintenance, which may or may not be needed.

Is it a bit of a gamble? Yes. That's the downside. But if you pay an independent mechanic to inspect a used vehicle before purchase, you'll hopefully have a reasonable idea of its condition. Of course, the mechanic likely won't be looking inside the engine valves, so they won't be able to see everything.

Don't forget, new vehicles can often be a big headache too. For example, according to Toyota, the Toyota Prius is allowed to consume up to 1L of oil every 1000km (that's 1.1qt per 600 miles) before Toyota will even start to consider it a problem. The car dealership isn't going to tell you that sort of thing before you hand over your money.

Answer 7

As the new vs. old question is addressed well in other answers, I'd like to address the question of loan vs. cash.

Although taking out a loan costs additional money over the long run, there is a key advantage of a loan that has not been mentioned in other answers:

Regular payments on a car loan will build positive credit history. It sounds like you're pretty young, so this could have a significant impact when you're looking to make other big moves in your life like renting an apartment (landlords check credit history) or buy a house (better interest rate).

Answer 8

I wouldn't finance and pay interest if you don't have to.

In your position, something to consider, is a 2-4 year old car with an extended warranty. In general, I don't think extended warranties are worth it, but one scenario where I think they are worth it may apply to you:

If you are not considering purchasing a used car primarily because you don't want to deal with repair costs, and if an extended warranty enables you to consider it, then it may be cost effective to get the warranty, compared to purchasing new.

Note that you can be completely against extended warranties and it might still be rational to purchase one! The reason is to compensate for other irrational decisions which are more costly. This is not necessarily a bad thing either; car buying often entails irrational decisions. Home buying even more so! (I bought the specific car I bought because I wanted a manual transmission, and they are slim pickings these days.)

I have first hand experience purchasing an extended car warranty despite knowing it was probably irrational to do so. In 2019 my wife wanted to purchase a brand new vehicle that was $42K. She was burned in the past with many thousands of dollars of repairs on a vehicle, so I was able to convince her that we could buy a similar fully loaded 2016 model for $20K, but she wanted the extended warranty, so we added it for about $2K. Despite a potentially wasted $2K, from my point of view, we still saved $20K. (Caveat: if we change vehicles when the warranty ends the equity difference will be about $9K, meaning the true savings is closer to only $11K instead of $20K. Essentially we paid $2K to save $11K.) Within 6 months of purchase there was an issue that cost $1100 to fix, and our cost with the warranty was $100, so at this point the cost of the warranty was only $1000, though all that does is make me feel less worse about buying it. (As of now we paid $1K to save $11K.)

Answer 9

Buying used cars is more expensive in the long run, and you have the money to buy a new/barely used car

Edit (clarifying for the comment below): I'm all for buying cars with up to 10/15k miles already on them (and still has some factory warranty) that are a cheaper than a full priced new car, what I'm against is what the top answer is suggesting "Buy a MUCH (MUCH) cheaper used car and just deal with the mechanical issues"

Used cars are a crapshoot, and are never actually as cheap as people claim (some folks will tell you "Yea just pick up a used gem of a car for like $1,000 and drive it until it falls apart", terrible advice for many reasons). If you want to try your luck buying $3,000 used cars every couple of years like people here are suggesting it, go for it.

New cars have factory warranties so you're guaranteed to not have any problems (or at least not pay for ones you might have) and beyond the factory warranty if you drive it properly (dare I say gingerly), maintain it properly (oil changes, etc), and keep an eye out for any potential leaks/puddles under the chassis, it'll last a VERY long time.

It's similar to home buying vs. renting: If you don't have money for a down payment on a house, the obvious short term cheaper option is to rent, same as with cars: if you don't have cash for a new or slightly used car: buy cheap cars and pray like hell, but OP does have the cash. It's like OP is asking "I have $200k in savings, should I buy a house for $150k?" and people are telling him "No, that's too much of your savings, you should rent instead"

My opinion: use 50% of your savings on the car, borrow the rest, drive the car properly and keep up with maintenance. Barring the incredibly rare, new car automotive horror story, you'll have the car for a very long time. OR, since you're not really at risk of being homeless should you lose your job or hit financial hardship, buy the car outright using 75% of your savings... especially if you're planning on sticking around your parents place for a little longer, live frugally and save back up to where you're at now.

this is going to get downvoted because everyone here is answering from their own perspective: most likely they're adults, they have a home, possibly children, and other financial concerns, so to them, dropping "75% of their savings on a car" is a DRASTICALLY different thing than your own situation, but they don't see it, OP: get the car, treat it properly, you won't have to worry about cars for 20+ years, if you start playing musical chairs with used cars every couple years you'll wish you hadn't. If "buying a used car and driving it until the wheels fall off, or until you get sick of it breaking down" is the best idea, why does almost no one who is gainfully employed, with positive cash flow and savings do it (not to mention with more than enough savings to buy a new one outright)? I'd bet the authors of answers telling you to go the "purchase a used car and drive it until it dies" route are NOT doing that themselves, and have a car they purchased new, or they lease

Answer 10

Spending the bulk of your savings on a £3000 car is a bad idea. You'll need to have a lot of money back for repairs, because repairs are very expensive when you pay others to do them.

At that funding level, the only sustainable option is DIY car maintenance.

You are simply being unrealistic to think you can take an older car and dole money out-of-pocket for every car repair that comes up. What will more realistically happen is you will neglect the maintenance until a repair comes up that you simply cannot afford, and then you'll have to park it or give it up. Even if you borrow and strain to pay that repair bill, around the corner will be another one that will finish you off.

However, the tables turn if you cultivate the skills (and tools) to maintain the car yourself. Suddenly instead of a £400 brake job, you are spending £60 on the parts and £40 on tools (which you can keep and not have to buy a second time).

You put yourself at fullest advantage by buying a car that is a) popular, and b) dog simple. Make those your priorities instead of "style" or "features".

And the first priority there is to get a traditional stick-and-clutch manual transmission. Why? Unlike automatics, the transmission almost never fails (meaning, if yours does fail, you can easily get a used one off a wreck for £100). Usually the clutch fails, and a clutch change is well within the reach of an amateur.

Likewise, manual steering removes two high-maintenance items: the steering gear, and the belt driven hydraulic pump. Manual gear is simple.

I don't know the UK market too well, but just to give a world-relevant example, a Ford Focus might work.

One rule of thumb is the fewer things on the fan belt, the better. For instance my car does not have power steering, nor A/C, nor a smog air pump.

The complexity of the engine onboard computer is usually not a concern, since they are exceedingly reliable in most cars. Sensors and actuators are the least reliable part, but they're cheap; the only real danger zone is doing poor diagnosis and concluding the computer is at fault when it's actually a sensor. *In my experience computers rarely fail, but replacing the computer is an expensive way to reset the computer; so people see a notable improvement after doing so. Always ask: "which sensor could cause this?"

Answer 11

Most of the answers are focused on the fact that in your situation you absolutely shouldn't be spending so much on a car (and they're for sure correct). But I just wanted to answer what I suspect was your intention in the question: "Should I pay in cash or pay in monthly installments"

and the answer is that it depends. Where I'm from it's very common for car purchases (at dealers, many 2nd hand cars/dealers won't have this option) to offer a interest free period (of typically several years). I would recommend this as you get a fair amount of profit by just safely investing the money for that period while paying the minimum repayments. Once the interest free period ends, pay off the remainder in it's entirety. Just make sure that you are allowed to pay it off completely and for no extra cost. Also be sure to not use the money for anything else and end up not being able to make a repayment on time. If you feel you can't do this then you should just pay in cash upfront, you never want to be paying interest when you have the cash. (unless you can use the money for something that will make you money, such as an appreciating asset or an investment, (this also applies if the car is being used to make money))

Answer 12

Do not buy a car. See update below.

There are good answers already, let me add one that might seem tangential, but I feel is important, as it is very often ignored.

Do you need a car, or do you want a car?

• if the answer contains ideas like "I would get to the job quicker", "there is often bad weather", "I have to be presentable at my job", "I need to visit x/y/z few times a year", "I need to transport furniture to my new apartment", "It is much easier", "everybody else my age has it" etc. then it is a want, not a need, and you should consider alternatives (like using bicycle or public transport - do some research there, it is often quite more usable than people think).
• it the answer is more like "I'm starting a business which requires transporting hundreds of kg of stuff daily" or "I work night shifts and in my area there is >x% chance I'd get robbed/raped/killed" then it is probably a need. Still, moving to another location or changing business idea might change that need to "want".

Also note: You say you were saving for 15 months to save 4000 GBP. Note that once you get a car, it will take you much longer to save another 4000 GBP. And that you'd want another car in 10-20 years even if you buy new one. Many people don't realize until they do a detailed calculation that even if they were given a fuel for free, their car will cost them plenty (there is not only fuel cost, but also insurance, paying damages for incidents, possibility of damage and theft, yearly registration and technical checks, parking and other tickets, planed and unplanned maintenance and repairs, often overlooked and expensive amortization etc.)

Update: After your update (and comment indicating you really only want it instead of needing it), I would advice against buying any car at this time (and especially against buying new one for 3000 GBP!)

It seems you can currently save about 160 GBP/month without owning car and living with parents. I'd recommend to get a bicycle and/or use public transport. Get a taxi for those rare moments you miss a last public transport (and you didn't use bike).

You say you'd like to move to live on your own in few years - do a calculation - what is cost of rent in your area? How much are your parents covering (beside shelter) - food, clothing, hygiene, etc? Are those costs added much less than 160 GBP/month (and if so, how much less)? Even if they are only a fraction of that cost, You should still have a healthy stash before you decide to move out, as you will run into unexpected costs along the way.

Note that car (especially new one) is one of things that lose values very quickly - so you can't really go with "I'll buy it and see how it goes, and sell it if it is not working financially" - you'd easily lose 20-30% of the value the moment you buy it.

Car also has many hidden costs. Even after you buy it with cash, car standing and running costs in USA can easily be 400 GBP/month! Probably different in your area, but you should definitely invest some time to investigate local prices for all those components of car full cost, and calculate how much that car would REALLY cost you per month (Total cost of ownership)!

So - calculate cost of living alone, and calculate full cost of a car (not just a price of a car and gas!), and see if both of those combined are less than 160 GBP/month. If not, you will have to give up on one (or both) of your wants (either you will continue living with parents indefinitely, or you will not have a car) until you get a better paying job.

Answer 13

It’s hard to say as there are multiple factors you could look at.

The first is most people will assume paying cash is best since you won’t have to pay interest. Excellent point.

But if you get a very low-interest rate, you could probably finance the car and make more money by investing the cash instead of using it to pay for a car. That’s worth considering.

Here's my opinion:

A car is a depreciating asset which means its value is constantly dropping. So, paying cash for something that is losing money value means that you’re losing money in two directions which is not a good thing.

It only makes sense to start considering a car loan as an option when you have the cash available to pay for the car you want, but you feel like you can find a better use for that money that is worth paying the interest on the auto loan.

Evaluate the options in front of your basis and take an informed decision.

Good Luck!